Meet the little-known UK stock that’s smashing the S&P 500’s finest!

With so much hype surrounding the S&P 500, it’s sometimes easy to overlook growth stocks closer to home.

For example, Goodwin (LSE:GDWN), the mechanical and refractory engineering group, has seen its share price rise by over 80% since 23 July. This beats all of the Magnificent 7. And every other stock on the FTSE 350. Yet I think it’s fair to say that not much is known about the company or its activities.

What does it do?

The group’s mineral-based products are designed to withstand extreme conditions. Fire prevention is a major part of its business. Elsewhere, there’s strong demand for its precision-machined castings that are used in defence and nuclear applications.

Goodwin’s been around for 140 years and now comprises 24 companies operating in 10 countries. I find it heartening to see the share price of a British engineering company outperforming those of California’s new kids on the block.

And after reporting a “strategic collaboration agreement” on 24 September, the company now has an opportunity to take itself to the next level.

Great potential

Northrop Grumman, an American aerospace and defence technology company, has placed a $16m order — with the potential to increase it to $200m — as part of four unspecified programmes that it’s working on. Goodwin will supply essential parts, including castings. It says the contract win reflects its “growing reputation as a trusted partner in delivering technically advanced components for mission-critical applications”.

With exposure to the defence sector, the group could benefit from heightened global tension. There’s definitely a trend towards more military spending by NATO members and others.

But it’s very difficult to value a stock like Goodwin. Investors have driven its share price higher on the back of a relatively small contract win, albeit one with large follow-on potential. However, there’s no indication as to the level of margin that might be earned or the timescale over which revenue will be generated.

Getting expensive

During the year ended 30 April, the group’s earnings per share was 327.17p. This means the stock’s now (23 October) trading on 43 times historical earnings. For context, Spirax Group‘s also a successful engineering business. But its historical price-to-earnings (P/E) ratio is around half this figure.

Goodwin’s P/E ratio is in Rolls-Royce territory, which some might argue is appropriate given that it’s also an engineering-cum-defence group. But the smaller of the two doesn’t have the recurring revenue of a civil aviation business to keep the cash rolling on. It seems to me that a lot of Goodwin’s potential has already been factored into its share price.

To justify a valuation at this level, it’s got to keep winning more of these types of contracts. And that’s going to be difficult. Any sign of operational issues with one or more of its major projects and the group’s share price could fall sharply.

However, its focus on the nuclear and defence sectors makes sense. There’s increased spending in both industries and Goodwin could be one of the beneficiaries. And the group’s clearly good at what it does. Northrop Grumman’s worth nearly $86bn so it can afford to be choosy over who it works with.

On balance, I think the stock’s one for long-term investors to consider.

The post Meet the little-known UK stock that’s smashing the S&P 500’s finest! appeared first on The Motley Fool UK.

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James Beard has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Goodwin Plc, Rolls-Royce Plc, and Spirax Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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